Report: State budget deficits will rise despite pension reform

A new report shows that Illinois’ recently enacted pension reform law will not eliminate the state’s chronic structural deficit. The report also says that even keeping the temporary income tax increase in place, coupled with pension reforms, the state’s budget deficit will continue to grow.

A new report shows that Illinois’ recently enacted pension reform law will not eliminate the state’s chronic structural deficit.

Released by the Fiscal Futures Project of the Institute of Public Affairs at the University of Illinois, the report says that even keeping the temporary income tax increase in place, coupled with pension reforms, the state’s budget deficit will continue to grow.

“The pension revision law of December 2013 was a huge step in the direction of fiscal stability for Illinois,” the report says. “Unfortunately, the state’s fiscal problems are so great that much remains to be done.”

Richard Dye, a co-author of the report, said it was important to illustrate that enacting pension reform was not a solution to the state’s budget problems.

“I think the fiscal problems of the state are not well enough understood that some might have been expecting that,” Dye said. “People should take (the report) as a reason not to be complacent, not to confuse the major and necessary changes in pension reform as solving the state’s problems. There’s still a long way to go.”

The report assumes that the pension changes will be upheld by the courts, something the report acknowledges may not happen. It also analyzed the budget deficit both from the angle that the temporary income tax increase will be made permanent and that it will be allowed to expire at the end of 2014.

The report found that the pension changes will have “modest impact” on spending, a reduction of $1 billion to $1.5 billion in each of the next 10 years.

If the temporary income tax is allowed to expire on schedule, the report says the state’s budget deficit could hit $13 billion by 2025. It put the deficit at $1 billion for the current budget year.

Even if taxes are kept the same rate and pension reforms survive a court challenge, the deficit will hit nearly $6 billion by 2025, the report says.

“Somebody has to pay more in terms of service reductions or tax increases,” Dye said. “The pensioners paid a lot in this last round, if it survives a constitutional challenge, but there’s more to come.”

The authors did not propose a solution.

“We are only trying to get a clear understanding of the problem,” Dye said. “What we have found is as soon as we suggest solutions, attention gets focused on that and why it won’t work. It facilitates denial.”

It would help, Dye said, if politicians put together a financial plan that looked seven to 10 years in the future. Doing that and sticking to it could probably produce a balanced budget for the state, he said. The problem is the plan will have to contain things that voters don’t want to hear.

Page 2 of 2 - “We’ve made a lot of cuts in the last four years, and we probably face additional cuts of the same magnitude. I don’t think people are ready for that,” Dye said. “Politicians don’t like to tell people it’s going to cost you more and you’re going to get less.”